China Law Blog

Interesting article the other day by Reinhardt Krause in Investor's Business Daily/CNN Story is entitled, "China, Companies Have A Lot At Stake Over Major Recalls" and it focuses on the recent rash of product safety problems coming out of China.

The story starts out by stating that it is "mostly suppliers that knowingly cut corners to reap higher profits" who are getting the blame for "China's credibility crisis." But China's climb up the value added product food chain also has caused many of its factories to struggle "to be up to snuff:"

"China is still very early in its industrial development and sins of omission are probably more likely than (purposeful) sins of commission," said Kent Kedl, general manager of Technomic Asia, which advises companies sourcing out of China.

The article quotes David Reid, who directs the highly regarded China Clinic for CEOs at Seattle University's business school, on China's strong desire to protect its "brand":

Aside from suppliers, Reid says China's government also wants to protect the reputation of Chinese companies that sell products globally, such as appliance maker Haier, PC maker Lenovo, auto maker Chery and telecom gear maker Huawei.

"Beijing realizes that its biggest opportunity is to develop brands, with a reputation for high quality and reliability, that have legitimacy in world markets," Reid said. "The (product quality) backlash isn't being taken lightly."

Paul Midler then states that the real problem facing those who outsource to China is that Chinese suppliers "knowingly cut back on product quality after a few shipments have been made," a process he calls "quality fade." Midler goes on to say it is "very difficult to use visual inspection or testing to solve a moral gap."

I then chime in:

While shoddy work has always been a problem in China, safety scares are a new wrinkle, says Daniel Harris, an attorney at Seattle-based law firm Harris & Moure.

"Everybody who does business in China knows quality issues are a problem," he said. But it has usually been about little things, handles that break off purses.

"Now, if you're constructing a building using Chinese steel, you're probably wondering if you should retest it. It's human nature to be thinking that way."

Harris recommends that overseas buyers run credit checks on prospective suppliers. He says inspection rights should be clearly defined in contracts.

Choosing suppliers in China's urban areas also may be a good idea, Harris says, because China's legal system is uneven.

"There's a lot more business litigation now in China than two years ago, and the courts are improving," he said. "But, a court in Shanghai or Beijing is going to be a lot more sophisticated than one in some backwards outlying province."

In case of recalls, though, U.S. companies will find it very difficult to collect damages from suppliers.

"The typical Chinese manufacturer just doesn't have a lot of money, in part because margins are so low," Harris said.

For my earlier post on this issue, setting forth the basics for protecting yourself from product quality problems, check out "CYA: China Outsourcer Protect Thyself."